Question

describe the risks that you might encounter when making financial decisions over the next few years.

Answer 1

The different types of risk associated with making financial decisions are: • Inflation: The major risk people face with their financial Investment is that the return from the asset might not be sufficient enough to beat the inflation. If the annual return from your investment was 5% per annum but the inflation during this period averaged 7% then the real rate of return on your investment was negative. Capital Loss: Another major risk associated with the investment in different financial product is that there might be sudden fall in the value of the asset and your capital might be eroded. Capital loss is a major risk associated with the equities or high yield bond. In the case of high yield bond there might be a high probability that the borrower might default on its obligation Financing cost: Many people want to buy car or house and most people buy them by taking a loan but while taking a loan if the terms and conditions like interest are not favorable then it can be very much difficult to repay the loan. Finding an optimal source of fund at justifiable rates is something that is very difficult to get. Taxation: Taxation in an Investment product can significantly affect the after-tax return of a product. Many municipal bonds pay less coupon rates than corporates bonds but some of the municipal bonds are tax free so if you compare the tax adjusted return for them you will often find that municipal bonds are better. Change in Income level: Change in income level can go both ways. It can be positive as well as negative. If the economy is booming then most people income level increases but when the economy condition is deteriorating then maintaining that income level becomes very difficult.